Volatility In The Financial Markets
Over the last week, Silicon Valley Bank (SVB) and Signature Bank in New York (SBNY) failed and were taken over by regulators. Equity markets were volatile to begin the week, the financial sector was hit, with many stocks in the Regional Banks Indices trading double-digit percentage points lower in the last several trading days.
The U.S. government and FDIC took several steps over the weekend to reinforce their support of the banking industry. On Sunday, the FDIC announced full protection for all depositors, including insured and uninsured balances. Depositors in SVB and SBNY had access to their entire deposit accounts beginning Monday, March 13, 2023. As a result of this support program, any losses to which the FDIC is subject will be recovered by special assessments to the banking sector. No losses will go to U.S. taxpayers. Finally, the U.S. Federal Reserve established a Bank Term Funding Program (BTFP) to provide liquidity to banks in the form of short-term loans (with a maximum term of one year). Banks can exchange qualifying assets (Treasurys, mortgage-backed securities, etc.) as collateral for a loan. Any collateral exchanged for short-term funding is valued at par, so financial institutions are not forced to liquidate assets at lower values and recognize significant losses.
What Does This Mean For Our Private Wealth Clients?
We expected ripples throughout investment markets as a result of the failures of SVB and SBNY, and markets are indeed temperamental. However, we’re encouraged by the response of the FDIC and the Federal Reserve. Furthermore, we do not view these failures as systemic, and we do not believe that SVB or SBNY, through counter-party risk, will create havoc in financial markets. We believe this was an idiosyncratic event as the result of the management of these firms. First Business Bank's business model is different and driven by relationships with strong clients. We put our clients first and listen to their needs and wants. We do have exposure to regional banks in our investment portfolio through ETFs, such as the Vanguard Total Market Index (VTI). Our exposure, however, is part of a diversified portfolio, and the holdings in any one regional bank are not a meaningful or significant allocation on their own.
We believe volatility is likely to remain in investment markets for the foreseeable future, as has been the case throughout many periods in history. The Federal Reserve meets this week to discuss its benchmark interest rate policy. As recently as last Wednesday, the probability of a 50-basis point hike was upwards of 70%. As of Tuesday, March 14, 2023, the possibility of a 50-basis point hike has all but been taken off the table. A pause in rate hikes by the Fed may provide much-needed stability to an unsettled market. We encourage clients to reach out to your team at First Business Bank with questions or to discuss the current market environment in more detail.